MANAGEMENT

PowerPoint Presentation by ACCOUNTING

Gail B. Wright
Professor Emeritus of Accounting 8th EDITION
Bryant University
BY
© Copyright 2007 Thomson South-Western, a part of The
Thomson Corporation. Thomson, the Star Logo, and
South-Western are trademarks used herein under license.
HANSEN & MOWEN

18 INTERNATIONAL ISSUES IN
1MANAGEMENT
INTRODUCTIONACCOUNTING
1
LEARNING OBJECTIVES
LEARNING GOALS

After studying this

chapter, you should be
able to:

2
 LEARNING OBJECTIVES
1. Explain the role of the management
accountant in the international environment.
2. Identify the varying levels of involvement
that firms can undertake in international
trade.
3. List the ways management accountants can
manage foreign currency risk.
4. Explain why multinational firms choose to
decentralize.
continued
3
 LEARNING OBJECTIVES
5. Describe how environmental factors can
affect performance evaluation in the
multinational firm.
6. Discuss the role of transfer pricing in the
multinational firm.
7. Discuss ethical issues that affect firms
operating in the international environment.

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Questions to Think About
4
QUESTIONS TO THINK ABOUT:
Milbourne Shutter Company

What are the business issues to

consider in deciding whether to
trade overseas?

5
QUESTIONS TO THINK ABOUT:
Milbourne Shutter Company

If exchange rates can either

increase or decrease, are the risks
equal? Would Jeff be more
concerned about one or the other?
Why or why not?

6
QUESTIONS TO THINK ABOUT:
Milbourne Shutter Company

When considering each

international order on a case-by-
case basis, what might influence
his decisions?

7
QUESTIONS TO THINK ABOUT:
Milbourne Shutter Company

Are there differences in

considerations for shipping
internationally & shipping to
another state? Or trade with France
versus trade with Russia or Iran?

8
LEARNING OBJECTIVE

Explain the role of

1
the management
accountant in the
international
environment.

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 LO 1

MANAGEMENT ACCOUNTING

In an international environment requires a

shift in perspective. There are:
Implications of foreign currency exchange
Differences in credit practices
Differences in cultural, legal, political, and
economic environments

10
LEARNING OBJECTIVE

Identify the varying

levels of involvement

2 that firms can

undertake in
international trade.

11
 LO 2

MULTINATIONAL CORPORATION
(MNC)

MNC “does business in more

than one country in such a
volume that its well-being &
growth rest in more than one
country.”1

1Hansen & Mowen, 2007, p. 808.

12
 LO 2

INTERNATIONAL TRADE
Levels of involvement
Importing & exporting
Concern:
Tariffs & foreign trade zones
Treaties
Wholly owned subsidiaries
Joint ventures

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 LO 2

TARRIFF: Definition

Is a tax on imported or
exported goods.

14
 LO 2

FOREIGN TRADE ZONES

Are set up by government in US near ports of
entry but considered outside US commerce.
Goods imported into foreign trade zones are duty
free
Company can postpone payments of duty
No duty on defective materials
Imported goods can be modified to meet US
regulations
High tariff components can be assembled into
lower-tariff finished products

15
 LO 2

ROADRUNNER VS.
WILYCOYOTE.: Background
Roadrunner operates a petrochemical plant
that imports volatile materials in a foreign
trade zone while a rival, Wilycoyote,
operates a similar plant just outside the
foreign trade zone. The two companies
pay duty on imports differently.

16
 LO 2

DUTY ANALYSIS
Roadrunner Wilycoyote
Duty paid at purchase $ 0 $ 24,000
Carrying costs of duty 0 1,920
Duty paid at sale 16,800 0
Total duty, duty-related costs $ 16,800 $ 25,920

Duty paid on sale by

Roadrunner is significantly
lower than duties paid by
Wilycoyote on import.

17
 LO 2

TARIFFS & TREATIES

Can be managed by treaties among
countries. NAFTA allows reduced tariffs
on goods imported among Canada, US,
and Mexico.

18
 LO 2

WHOLLY OWNED
SUBSIDIARIES

Can be purchased companies or

companies set up as subsidiaries or
branch offices in foreign companies.

19
 LO 2

OUTSOURCING: Definition

Is payment by a company for

business functions formerly
done in-house.

20
 LO 2

JOINT VENTURE: Definition

Is a type of partnership in which

investors co-own the enterprise.
A special example is a
maquiladora, a manufacturing
plant in Mexico.

21
LEARNING OBJECTIVE

List the ways

management

3 accountants can
manage foreign
currency risk.

22
 LO 3

FOREIGN CURRENCY RISK:

Definition

Refers to the company’s

management of its transaction,
economic, & translation risks
due to exchange rate
fluctuations.

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 LO 3

MANAGING CURRENCY RISK

Transaction risk
Possibility that future cash transactions will be affected by
exchange rate fluctuations
Economic risk
Possibility that a firm’s present value of future cash flows
will be affected by exchange rate fluctuations
Translation (accounting) risk
Degree to which firm’s financial statements are exposed to
exchange rate fluctuations

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 LO 3

SPOT RATES
Exchange rate on
spot market for US
dollars.

EXHIBIT 18-1
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 LO 3

MANAGING TRANSACTION RISK

Companies face risk of currency appreciation

(depreciation). They can manage the effects
of fluctuating exchange rates on cash
transactions by using
Spot (immediate) rate
Hedging
Forward exchange contract for specified amount at
specified rate on specified future date.

26
 LO 3

TRANSACTION GAINS, LOSSES:

Background

SuperTubs, Inc. sells whirlpool tubs at home

and in foreign markets. SuperTubs sold
100 tubs on 1/15 for $1,000 each to be
paid 3/15. The exchange rate on 1/15 is
.82 euros per $1. What is the gain/loss on
3/15 if the exchange rate is .84 euros on
3/15? If the exchange rate is .80 euros?

27
 LO 3

EXCHANGE RATE LOSS

Receivable in dollars 1/15 $ 100,000

Receivable in dollars 3/15 97,619
Exchange loss $ 2,381

The exchange rate rose from .82

euros to .84 euros per $1,
providing an exchange loss.

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 LO 3

EXCHANGE RATE GAIN

Receivable in dollars 1/15 $ 100,000

Receivable in dollars 3/15 102,500
Exchange gain $ 2,500

The exchange rate dropped from

.82 euros to .80 euros per $1,
providing an exchange gain.

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 LO 3

HEDGING CURRENCY
FLUCTUATIONS: Background
SuperTubs, Inc. engages in hedging to offset
a possible loss on exchange rate
fluctuations. On 1/15, SuperTubs
purchased a contract to exchange 82,000
euros into dollars at a forward rate of .825
euros. On 3/15, SuperTubs pays 82,000
euros to the dealer and receives $99,394.

30
 LO 3

HEDGING

Receivable in dollars 1/15 $ 100,000

Receivable in dollars 3/15 99,394
Premium expense $ 606

The cost of hedging against

currency fluctuations is less than
the loss from doing nothing.

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 LO 3

MANAGING ECONOMIC RISK

Companies must manage risk to the present
value of future cash flows due to exchange
rate fluctuations. The management
accountant must:
Understand the company’s position in a global
economy
Provide financial structure and communication
for the firm
Encourage use of hedging

32
 LO 3

MANAGING TRANSLATION RISK

Companies must manage risk presented when
the effects of financial transactions are not
the same in different currencies.
Multinational, Inc., has a foreign division
(FD) with eroding sales. Management
directs FD to increase marketing
expenditures, which FD does by increasing
the expenditures by 10% per quarter.

continued
33
 LO 3

MARKETING EXPENDITURES
Quarter Expenditures in Local Currency
1 LC 10,000
2 LC 11,000
3 LC 12,100
4 LC 13,310

Expenditures in local currency

were increased by 10% per
quarter over the year.

34
 LO 3

MARKETING EXPENDITURES
Quarter Expenditures in Dollars
1 $ 10,000
2 9,167
3 8,963
4 8,873

Expenditures in dollars were

decreasing each quarter over
the year, a fact hidden in
currency translation.

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LEARNING OBJECTIVE

Explain why

4 multinational firms
choose to
decentralize.

36
 LO 4

ADVANTAGES OF
DECENTRALIZATION
Local level information is higher quality
Local managers can make a more timely
response in decision making
Less likely to misinterpret instructions at local
level due to language differences

37
 LO 4

How do MNCs address

language differences?

MNCs 1) push decision making

down to local manager, and 2)
incorporate technology that
overrides language barriers.

38
 LO 4

How do MNCs address

decentralization?

MNCs create different divisions

by 1) geographic lines, 2)
product lines, and 3) functional
management lines.

39
LEARNING OBJECTIVE

Describe how
environmental factors

5 can affect performance

evaluation in the
multinational firm.

40
 LO 5

EVALUATING PERFORMANCE
Managers should be evaluated only on those
factors that the manager has control over.
Evaluations based on revenues or costs are
not affected by currency fluctuations.
Comparative evaluations are difficult
because of cultural differences between
countries.

41
 LO 5

ENVIRONMENTAL FACTORS
Many environmental
factors affect
performance.

EXHIBIT 18-2
42
 LO 5

What measures are best for

performance evaluation in an
international setting?

Multiple measures are the best

approach. Include EVA
(economic value added) or ROI
for short term measures.

43
 LO 5

OTHER PERFORMANCE
MEASURES
To discourage myopic behavior from relying
on short term performance measures,
include
Market share
Customer complaints
Personnel turnover ratios
Personnel development

44
LEARNING OBJECTIVE

Discuss the role of

6 transfer pricing in the

multinational firm.

45
 LO 6

How can transfer pricing

affect the taxes a company
pays?

Transfer pricing can shift

revenues and costs between
high & low tax countries.

46
 LO6

USING TRANSFER PRICING

Carefully crafted
transfer pricing can
reduce corporate
taxes.

EXHIBIT 18-3 47
 LO 6

What methods can be used

for transfer pricing?

Transfer pricing methods

include 1) comparable
uncontrolled price, 2) resale
price, and 3) cost-plus price.

48
LEARNING OBJECTIVE

Discuss ethical issues

that affect firms

7 operating in the
international
environment.

49
 LO 7

GLOBAL ETHICS: Richard J. Mahoney,

CEO Monsanto

“. . . we continually face the problem of

different cultures & different cultural
expectations. A service fee in 1 country is
a bribe in another. Environmental laws
can be extraordinarily strict in a country
but not enforced-& your neighbors laugh
at you for obeying the laws.”2

2Hansen & Mowen, 2007, p. 826

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CHAPTER 18

THE END

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